How student discounts work

Student discounts are offered many places – in restaurants, theaters, tuxedo rentals – and in both the commercial and nonprofit sectors. Nonprofits might want to discount student prices on equity grounds, giving them a break because they have less disposable income. But commercial firms offer these discounts too. It might be to try to gain loyalty to the brand that will extend beyond the customer’s student years. But it also could be simple price discrimination, recognizing that students have different demand patterns than graduates.

How to set the discount? I’ll keep using students as my example, but this strategy can be applied to any identifiable group: seniors, veterans, those on social assistance, those who live within a particular geographic region, etc. All that matters is that you can identify whether or not the customer belongs to the group.

To begin, imagine students and non-students as separate markets, in the same way that publishers and pharmaceutical companies treat different nations as separate markets. Then for each market, set the price that maximizes net revenues in that specific market. In other words, pick a student price that maximizes net revenues from students, and pick a non-student price that maximizes net revenues from non-students. This requires gathering intelligence on how these different segments of the population behave. How does student demand respond to a lowering of prices? How about the demand by non-students? You need to gather information on each of these types of sales over time to get a sense of the different demand patterns. Only then can you set about finding the prices for each segment that generate the most net revenue.

What are the limitations on the strategy?

First, there has to be a means whereby students cannot resell their purchases to non-students, making a profit for themselves. Perhaps student admissions are clearly marked as such, or the good cannot be bought in advance (like a ticket) but must be consumed directly on the premises (as in restaurants). Firms who price discriminate across countries in which they sell can only make it work if no one has incentive to purchase the good in the low-price country and ship it to the high-price country for resale at a profit.

Second, keep in mind that the higher the price differential between the two market segments, the higher the incentive for customers to cheat. Nobody is going to look for a fake student identification card in order to get a 10% discount at the local lunch buffet, but if it is a 50% discount and more is at stake, they might.

Third, as the price differential increases, those paying the higher price might come to feel that their own price is unfair, and be turned off buying at all. This risk is increased if the group receiving the discount is not particularly impoverished, but simply has different willingness-to-pay for the product. Discounts for seniors are not likely to be as problematic in this respect, since it is a discount most people hope to one day enjoy themselves.

Each of these limitations works in the same direction: don’t make the discount too large, even if demand patterns are quite different across the two groups, as it will increase incentives for attempts at resale, and for people falsely identifying themselves as being in the group receiving the discount, and lead to bitterness by those paying a higher price. The less these factors are likely to be an issue, the more the pure strategy of focusing on demand by the two market segments can be used.

Michael Rushton

Michael Rushton teaches in the Arts Administration programs at Indiana University in Bloomington. An economist by training, he has published widely on such topics as public funding of the arts, copyright, nonprofit organizations and tax policy, and served as Co-Editor of the Journal of Cultural Economics. At IU he teaches Read More…

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